Cat modellers overestimate losses

Catastrophe models that are designed to project insured losses in the US from Atlantic hurricanes significantly overestimate their losses, claimed Karen Clark & Co.

So called “near term models” were introduced by the three major catastrophe modelers, AIR Worldwide (AIR), EQECAT and Risk Management Solutions (RMS) in 2006, following the destructive and costly 2004 and 2005 hurricane seasons.

Each of the companies initially projected insured losses at least 35% above the long-term average for the period 2006 to 2010, claimed the independent cat modeler Karen Clark.

AIR lowered its figure to approximately 16% in 2007. EQECAT has made only minor adjustments to its original estimate. RMS introduced modifications to its model in 2009, but still predicted losses 25% above the long-term average.

These percentages translate into cumulative insured losses from 2006 to 2010 of between $60bn and $70bn, for the AIR, EQECAT and RMS models.

But the actual cumulative losses were only $15.2bn, said Karen Clark.

No hurricanes made landfall in the United States during the 2010 season, and consequently US insured property losses were minimal.

This is in spite of the fact the 2010 season was one of the busiest on record, with 19 named storms in the Atlantic, of which 12 became hurricanes and five became major hurricanes.

“A short time horizon is not sufficient for credibly estimating insured losses from hurricanes,” said Karen Clark, president and CEO of Karen Clark & Co. “Tropical cyclone activity changes markedly year to year, and even a near-record season of storm activity such as 2010 does not necessarily translate into large insured losses.”

The fact there were no 2010 landfalls is related to the “Hurricane Frequency Paradox”, she continued. “Some scientists suggest there has been an increase in Atlantic tropical activity. Paradoxically, this apparent increase has not resulted in an increase in hurricane landfalls in the United States.

“If in fact there are more Atlantic tropical cyclones, then over the past four decades the percentage of storms making landfall has declined to about 60%, compared to an average of about 75% prior to 1965.”

Researchers at the National Oceanic and Atmospheric Administration (NOAA) have concluded that the increase in annual storm frequency is in large part attributable to improvements in observational technology leading to the increased detection of tropical storms and hurricanes.

This is particularly true for short duration storms originating in the Eastern Atlantic, far removed from potential landfall.

Prior to the introduction of satellite technology, such storms were dependent upon oceangoing ships for detection.

The 2010 season is a case in point. Three tropical storms, Bonnie, Gaston and Nicole, were short duration storms of two days or less. Lisa, Otto and Shary were hurricanes for less than 24 hours.

“There is simply no clear basis for concluding we are in a period when losses associated with hurricanes should be expected to be well above the long term average,” concluded Clark.